Wednesday, 2 March 2011

King fails to convince the Treasury Committee

Mervyn King is again trying talk down inflation. He told the Commons' Treasury committee that "inflationary pressures [will be] pretty much back to target by around the middle of this year".

King confirmed that the Bank's counter-inflationary strategy is unchanged. It will try and wait out what it regards as a series of one-off shocks such as higher taxes and oil prices. By the summer, these effects will have fed through into consumer prices and gradually fade out thereafter.

However, he had to concede that inflation will rise at a seasonally adjusted annualised rate of almost 7 per cent this quarter. He also had to acknowledge that the inflationary outlook could deteriorate if the political situation in Middle East went pear-shaped, leading to a further increase in the cost of oil.

He also had to admit that the Bank had under-estimated the impact of both the commodity price inflation and the persistent effects of the exchange rate depreciation.

So to summarize; the bank believes that inflation will fall all by itself; there are alarming downside risks to the inflationary outlook and the Bank has accumulated an uneviable record of under-estimating inflationary pressures.